In our recent Milken Institute Review article on the economics of the Federal Flood Insurance Program, John and I list--and then attempt to debunk--several possible reasons why the government intervenes in the flood insurance market. For example, we point out that:
One argument for intervention turns on the idea that people in flood-prone areas can't rationally calculate the probability of flood damage and thus fail to make good decisions about insurance.
Since hurricane season officially starts today, I thought I would adapt the above slightly:
One argument for [government forced evacuations of hurricane residents] turns on the idea that people in [hurricane]-prone areas can't rationally calculate the probability of [hurricane] damage and thus fail to make good decisions about [evacuating].
In the Milken piece, we lay out two opposing schools of thought on how people behave in the face of low-probability high stakes events.
One view is that [people faced with low-probability high stakes events] tend to focus on the payout -- death or greater riches -- and either vastly overestimate or ignore entirely the probability of the even occurring...By focussing on the outcome if the event happens, these people act as if the event will happen.
More to the point here, another school of thought asserts that people either systematically underestimate the likely damage from a negative event or assign too low a probability to a low-frequency event happening. This leads to a sense of invincibility on the decision maker...
It looks like officials in hurricane prone states believe the latter and are taking action to make sure residents know the true probability and potential cost of another Katrina. From the NYTimes:
Convinced that tough tactics are needed, officials in hurricane-prone states are trumpeting dire warnings about the storm season that starts on Thursday, preaching self-reliance and prodding the public to prepare early and well.
Cities are circulating storm-preparation checklists, counties are holding hurricane expositions at shopping malls and states are dangling carrots like free home inspections and tax-free storm supplies in hopes of conquering complacency.
But the main strategy, it seems, is to scare the multitudes of people who emergency officials say remain blasé even after last year's record-breaking storm season.
To persuade residents to heed evacuation orders, the Florida Division of Emergency Management is broadcasting public service announcements with recordings of 911 calls placed during Hurricane Ivan in 2004.
"The roof has completely caved in on us," a woman cries as chilling music swells, only to be told that rescuers cannot come out during the storm.
Speaking of the tactics, Craig Fugate, Florida's emergency management director, said last week at a news conference in Tallahassee, "We're going to use a sledgehammer."
But it doesn't look like the strategy is having much impact, at least initially:
But will it work? Emergency management officials groaned this month at a poll by Mason-Dixon Polling and Research Inc., which found that of 1,100 adults along the Atlantic and Gulf Coasts, 83 percent had taken no steps to fortify their homes this year, 68 percent had no hurricane survival kits and 60 percent had no family disaster plan.
"I can't rightfully say I see any increased sense of people getting ready," said Larry Gispert, emergency management director in Hillsborough County, Fla., home to Tampa. "It's like a psychological issue — 'If I don't think about bad things, bad things won't happen.'
D'oh! This reminds me of one of my favorite bumper stickers:
Lotteries: a tax on people who flunked math.
I'm thinking of printing my own:
Federal hurricane response: a subsidy for people who flunked statistics.
